Canada’s trade surplus disappears while U.S. deficit shrinks

Exports in February declined 2.4% to $45.3 billion after reaching a record high in January, while imports gained 0.6% to $46.3 billion over the same period.

While Canada’s trade surplus with the United States increased to $4.5 billion in February, from $4.4 billion in January, the country’s trade deficit with countries other than the U.S. increased to $5.4 billion for February, compared with $4 billion in January.

In a research note, TD Economics senior economist James Marple says, “The weakness in exports was broad-based, with eight of eleven segments declining. The rise in imports was less broad, mainly focused in motor vehicles and parts, agriculture and special transactions trade.”

He adds, “The decline was mostly a volume story. In inflation-adjusted terms, real exports fell 2.5%, while imports rose 0.3%.”

Marple also suggests “potential changes to NAFTA continue to make headlines and will be a point of concern for Canadian policymakers. Still, given the depth of the two-way trading relationship between the two countries and encouraging comments from the U.S Commerce Secretary, we do not expect to see major changes to the agreement between the two countries.”

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In a report, CIBC’s Nick Exarhos says, “And just like that, we’re back to a deficit in Canadian trade. […] That’s a deterioration from a downwardly revised January, and with a volume decline of 2.5%, we do indeed seem poised for some slippage in output after a remarkably strong January for Canadian GDP.”

In a week ahead release, posted prior to these results, Scotiabank says one month of trade data won’t influence the BoC. The bank says, “Exports have done nothing over the past year and, so, one print on its own won’t change anything at the BoC. […] The BoC has long hoped for a rotation of the sources of growth away from the household sector and toward investments and exports,” but a “policy shift” won’t happen until “a protracted period of improvement has been registered with confidence it will stick.”

Read: BoC survey shows modest investment pickup

Even if there had been a surplus, this suggests there would still be a long way to go before BoC makes a move.

Read: Future of private investment depends on direction of monetary policy

Meanwhile, in the U.S.

The deficit shrank to US$43.6 billion in February, 9.6% smaller than January’s deficit of US$48.2 billion, the Commerce Department reported Tuesday.

Exports rose a tiny 0.2% to US$192.9 billion while imports dropped 1.8% to US$236.4 billion, as the flow of Chinese goods tumbled by US$8.6 billion, led by a big drop in cellphone imports.

The politically sensitive trade deficit with China narrowed to US$23 billion, 26.6% below the January total. President Donald Trump, who was sharply critical of Chinese trade practices during last year’s presidential campaign, will hold his first meeting with Chinese President Xi Jinping later this week in Florida.

In a tweet last week, Trump said that his meeting at Mar-a-Lago with the Chinese leader would be “a very difficult one in that we can no longer have massive trade deficits and job losses.”

During the campaign, Trump attacked China for pursuing unfair trade practices such as manipulating its currency. He said that if China did not reform, his administration would impose punitive tariffs on Chinese imports. So far, Trump has not followed through on those threats. But his meetings with Xi on Thursday and Friday could prove pivotal in determining the administration’s future course in relations with China.

Trump often targeted China and Mexico for attacks on the campaign trail, blaming both nations for the loss of millions of good-paying U.S. factory jobs. Trump has said he will renegotiate the North American Free Trade Agreement with Mexico and Canada, which Trump called a “disaster” during the campaign.

However, a draft letter that would begin the renegotiation process, which leaked last week, indicated that at least initially, Trump was taking a less combative approach in the renegotiations.

The small rise in exports in February was led by U.S.-made autos and autos parts, which climbed 1.5% to the highest level since July 2014. Exports of petroleum products were up 8.6%. Those gains helped offset declines in exports of commercial airplanes, farm products and industrial engines.

American manufacturers have struggled for more than a year with economic weakness in major export markets and a rising value of the dollar, which makes U.S. goods less competitive on foreign markets. However, economists believe both of those trends may ease in 2017, helping to lift the fortunes of American exporters.

The trade deficit is the difference between exports and imports. A larger deficit reduces overall economic growth because it means the country is buying more products from foreign producers rather than domestic companies. Last year’s deficit was US$500.6 billion.

The deficit with Mexico shot up 46% in February to US$5.8 billion while the deficit with Canada, the other partner in NAFTA, dropped 38.1% to US$2.1 billion.

The deficit with the European Union declined 18.6% to US$9.4 billion, led by a 9.2% drop in the deficit with Germany.